Is Greed Good?

A Free Capitalist Society Moderates the Passions

“Unbridled avarice is not in the least the equivalent of capitalism, still less its ‘spirit’.”

—Max Weber[1]

Recently greed has become a popular term of endearment. There’s even a TV game show by that name. In 1987, Oliver Stone released a popular movie called Wall Street, in which Gordon Gekko, the fictional dealmaker extraordinaire, declares, “Greed is good.”

In the 1990s, as capitalism, technology, and the financial markets advanced, some free-market economists defended Gekko’s speech, arguing that the pursuit of greed is beneficial and an integral feature of market capitalism. It motivates individuals to work harder, to create new and better products. As Bernard Mandeville wrote in The Fable of the Bees (1714), the private vices of greed, avarice, and luxury lead to abundant wealth.

On the other hand, critics of capitalism, from Thorstein Veblen to John Kenneth Galbraith, have long argued that capitalism unleashes greed, creating greater inequality, alienation, and deception in society. Capitalism is, in short, morally corrupting, both for the individual and business.

Which view is more accurate?

Part of the problem is in the definition of the word. If greed simply means enthusiastically pursuing one’s self-interest, there is no harm in it and a great deal of good. Unfortunately, greed carries excessive baggage beyond honest initiative. Webster’s Dictionary defines greed as “excessive desire for acquiring or having.” A greedy person “wants to eat and drink too much” or “desires more than one needs or deserves.” This conjures up passages of conspicuous consumption from Veblen’s Theory of the Leisure Class, or scenes of the miserly banker foreclosing on the poor in Frank Capra’s film It’s a Wonderful Life. Is that what capitalism leads to?

Greed is no virtue in the financial markets. Too many inexperienced, gullible investors get caught up in the latest hot market, only to buy in at the top. As J. Paul Getty warns, “The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator.”[2]

Montesquieu to the Rescue

In researching my forthcoming book, The Making of Modern Economics (M. E. Sharpe Publishers), I have uncovered several economic thinkers who make an important contribution to this issue. Charles de Montesquieu (1689-1755) was the first major figure during the Enlightenment to maintain that commercial activity restrains greed and other passions. In his classic work, The Spirit of the Laws (1748), Montesquieu expressed the novel view that the business of moneymaking serves as a countervailing bridle against the violent passions of war and abusive political power. “Commerce cures destructive prejudices,” he declared. “It polishes and softens barbarous mores . . . . The natural effect of commerce is to lead to peace.”[3] Commerce improves society: “The spirit of commerce brings with it the spirit of frugality, of economy, of moderation, of work, of wisdom, of tranquility, of order, and of regularity.”[4]

Adam Smith (1723-90) held similar views. He wrote eloquently of the public benefits of pursuing one’s private self-interest, but he was no apologist for unbridled greed. Smith disapproved of private gain if it meant defrauding or deceiving someone in business. To quote Smith: “But man has almost constant occasion for the help of his brethren . . . . He will be more likely to prevail if he can interest their self-love in his favour . . . . Give me that which I want, and you shall have this which you want, is the meaning of every such offer.”[5] In other words, all legitimate exchanges must benefit both the buyer and the seller, not one at the expense of the other. Smith’s model of natural liberty reflects this essential attribute: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.”[6]

Smith favored enlightened self-interest and even self-restraint. Indeed, he firmly believed that a free commercial society moderated the passions and prevented a descent into a Hobbesian jungle, a theme echoing Montesquieu. He taught that commerce encourages people to defer gratification and to become educated, industrious, and self-disciplined. It is the fear of losing customers “which retrains his frauds and corrects his negligence.’[7]

In sum, no system can eliminate greed, fraud, or violence. Socialism and communitarian organizations promise paradise, but seldom deliver. Oddly enough, it may be a freely competitive capitalist economy that can best foster self-discipline and control of the passions.

Notes

Quoted in Jerry Z. Muller, Adam Smith in His Time and Ours (Princeton, N.J.: Princeton University Press, 1993), p. 194.

J. Paul Getty, How to Be Rich (New York: Jove Books, 1965), p. 154. This book is required reading for all investors.

Charles de Montesquieu, The Spirit of the Laws (Cambridge: Cambridge University Press, 1989), p. 338.

Quoted in Albert O. Hirschman, The Passions and the Interests (Princeton, N.J.: Princeton University Press, 1997), p. 71. I highly recommend this book on pre-Smithian views of capitalism.

THE FREEMAN

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.